Utterwulghe, S. 2014. Fostering private sector development in fragile states: Why public-private dialogue is part of the recipe. GREAT insights Magazine, Volume 4, Issue 1. December 2014/January 2015.
Private sector development in fragile states
Private sector development (PSD) is playing a crucial role in the expanding field of post-conflict economic development and poverty alleviation strategies in fragile states. However, fragile states face major private sector challenges such as difficult access to finance, power and markets, poor infrastructure, high levels of corruption and a lack of transparency in the regulatory environment.
Paul Collier, among others, has studied the correlation between conflict, stagnation and poverty, defining the vicious cycle that affects fragile states and post-conflict countries as the conflict trap. (1) Fragility will impede economic development and, according to the World Bank’s World Development Report 2011: Conflict, Security, and Development, lack of economic opportunities and high unemployment are key sources of fragility. The private sector has nevertheless shown resilience in the face of conflict and fragility, operating at the informal level and delivering services that are traditionally the mandate of public institutions, as is the case in Somalia. However, in post-conflict situations, PSD can have predatory aspects, thriving on the institutional and regulatory vacuum that prevails. (2) Pro-poor and growth strategies need to focus on strengthening the positive aspects of PSD – the private sector being the creator of 90% of jobs worldwide – while tackling its negative aspects.
Improving the investment climate
Investment climate interventions, such as those implemented by the World Bank Group and other development donor agencies, aim at improving the economy as a whole in order to boost local and foreign investment, and eventually stimulate growth and generate employment.
As mentioned, post-conflict business environments are characterised by informality, predatory behaviours, and stifling, obsolete or absent business regulations, which discourage potential investors. The most common areas which require legal and regulatory reforms that affect the life of a business and can boost the investment climate include: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and employing workers (Figure 1). (3)
Figure 1. Doing business in g7+ economies and fragile and conflict-affected states (FCS) is comparatively more difficult (4)
Most fragile states and post-conflict economies, the majority found in sub-Saharan Africa, lie at the bottom of the World Bank’s Doing Business ranking (Figure 2). Improving the business environment by easing the way of doing business will bolster formal private sector activities as well as state authority and service delivery. Indeed, increased economic activity and sustainable investment will boost the state’s revenue through taxation and enhance its credibility vis-à-vis its citizens.
Figure 2. On average, g7+ and FCS economies rank in the bottom third in all areas measured by Doing Business
J. Nelson from Harvard University posits that in fragile states and post-conflict economies, there is often deep mistrust between the government and the private sector, resulting from prevalent rent-seeking behaviours, cronyism and lack of legitimacy. (5) To overcome the lack of transparency and to create trust and confidence, it is imperative to engage the private sector in policy reforms dialogue. Public private dialogue (PPD) mechanisms have proven to be very effective instruments to engage stakeholders in regulatory reforms, especially in fragile and conflict-affected situations (FCS).
Public private dialogue in fragile states
M. Porter argues that government “regulation is necessary for well-functioning markets and that the right kind of regulation can actually foster economic value creation”. (6) However, badly designed regulatory frameworks which have not benefited from the private sector’s inputs will have adverse effects. Such top-down business regulations and reforms will be resisted by businesses and will hinder investments, economic growth and employment generation.
The World Bank Group defines PPD as a structured engagement mechanism that aims to bring together all relevant stakeholders, in a balanced and inclusive manner, to assess and prioritise issues, and achieve sustainable results, facilitated through a trust enabled convening platform. A recent World Bank report on PPD in fragile states claims that PPD is highly necessary in fragile and conflict-affected situations to fill the gap resulting from the lack of legitimate institutions, to help create transparency and trust among stakeholders, and to identify the need for reforms and interventions that can improve the business environment and attract investment. (7)
The same report argues that the main impediments to achieving PPD objectives in fragile states stem from weak government institutions and private sector, and from fragmentation within the private sector (Figure 3).
Such findings have led development agencies to focus on the prerequisite of institutional capacity and to support public-public and private-private dialogues before bringing all the relevant stakeholders together. Furthermore, many developing countries, let alone fragile states, do not fully possess the capacity, resources, or institutional strength to support a platform for stakeholder dialogue. There is a crucial need for flexible and multi-faceted mechanisms to facilitate productive private sector participation. The World Bank, for example, advises and supports PPD processes at three levels:
This multi-pronged approach has enabled the tailoring of context-sensitive PPD mechanisms and structures that ensure solution-oriented processes, local ownership, inclusiveness, and sustainability of reforms.
PPD contributes to all steps of the reform process. It helps identify the core bottlenecks to be addressed and empower the stakeholders. It builds consensus and trust in the solution design phase. PPD finally contributes to the key elements of regulatory reforms: the implementation and monitoring of legal and regulatory enactments (Figure 4). Through the structured dialogue between government bodies and businesses, workable reforms are identified and systems are put in place to ensure that the reforms work.
In summary, the benefits of PPD mechanisms include:
Impact of PPD in fragile states
The Nepal Business Forum (NBF), an economy-wide form of PPD, is helping to address key drivers of private sector development and improve market opportunities. To date, three reforms in the tax, export credit, and hydropower sectors have generated US$8 million in private sector savings. It is expected to generate US$10 million in private sector savings through its support for reforms. The NBF has been instrumental in creating a culture of dialogue between the public and private sectors and in building trust among stakeholders during this post-conflict period marred by political instability.
The Afghanistan Private Sector Advocacy Forum (APSAF), a sector-specific PPD initiative, helped identify bottlenecks in trade licensing procedures and prioritised licenses. A reduction in the time and cost of registering a business and obtaining a trade license has made starting a business in Afghanistan easier.
The Liberia Better Business Forum (LBBF) seeks to drive the creation of quality employment, poverty alleviation, and economic development by enhancing the business environment for private sector growth. The reforms implemented so far have yielded US$4.7 million in private sector savings, created 20,400 new jobs, increased business registrations by 20%, and attracted US$13 million in private sector investment.
In fragile states and post-conflict countries, basic societal and institutional structures are broken or have been weakened. The public sector lacks capacity and credibility, and an ineffective regulatory framework has led private businesses to operate in the informal sector. Furthermore, corruption, lack of trust, transparency and accountability has dampened sustainable private sector development and investment, hampering economic growth and job creation. In order to rebuild the confidence of economic actors, reforms need to be enacted and regulatory constraints eliminated to improve the investment climate and the business environment. Public Private Dialogue mechanisms have demonstrated that they are effective trust-enabling platforms that allow all relevant stakeholders to work jointly in a transparent way on the identification of private sector development constraints and the creation of sustainable policy reform solutions.
Steve Utterwulghe is a Senior Private Sector Development Specialist and the Global Lead for Public Private Dialogue at the World Bank Group.
4. The g7+ group is a country-owned and country-led global mechanism to monitor, report and draw attention to the unique challenges faced by fragile states. The group now comprises of 20 fragile states. Strength of legal institutions refers to the average ranking on getting credit, protecting investors, enforcing contracts and resolving insolvency. Complexity and cost of regulatory processes refers to the average ranking on starting a business, dealing with construction permits, getting electricity, registering property, paying taxes and trading across borders. Doing Business in the G7+, 2013, World Bank.
7. World Bank, Public-Private Dialogue in Fragile and Conflict-Affected Situations: Experiences and Lessons Learned, 2014, The World Bank Group. https://www.wbginvestmentclimate.org/